Omaha Nat'l Bank v. Comm'r of Internal Revenue (In re Estate of Fuchs), Docket No. 558-65.
| Decision Date | 23 November 1966 |
| Docket Number | Docket No. 558-65. |
| Citation | 47 T.C. 199 |
| Parties | ESTATE OF BERT L. FUCHS, DECEASED, THE OMAHA NATIONAL BANK, CO-ADMINISTRATOR, PEARL J. FUCHS, CO-ADMINISTRATRIX, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Marvin G. Schmid, for the petitioner.
Ronald M. Frykberg, for the respondent.
Held, insurance proceeds from an accidental death insurance policy not includable in decedent's gross estate because he lacked ‘incidents of ownership’ in said policy within the meaning of sec. 2042, 1954 Code.
Respondent determined a deficiency in estate tax in the amount of $17,734.53.
Petitioner has not raised issue with respect to certain items in respondent's notice of deficiency. The issue for decision is whether respondent erred in including in the gross estate of Bert L. Fuchs the amount of $100,000, which represented the combined proceeds of two policies of accident insurance paid to two beneficiaries named in the policies, after his death.
Some of the facts are stipulated and as stipulated are so found.
Bert L. Fuchs (hereinafter referred to as decedent) died intestate on September 2, 1960.
The Omaha National Bank and Pearl J. Fuchs— decedent's widow (hereinafter referred to as Pearl)— are the duly appointed, qualified, and acting coadministrator and coadministratrix, respectively, of decedent's estate. A Federal estate tax return for decedent's estate was filed with the district director of internal revenue, Omaha, Nebr.
Prior to September 2, 1960, decedent, Pearl, John J. Fuchs (hereinafter referred to as John), and Forrest L. Pflasterer hereinafter referred to as Forrest) were partners who owned and operated a mill supplies and machine tool business in Omaha under the partnership name of Fuchs Machinery & Supply Co. (hereinafter referred to as the company). Hereinafter reference to the partners will refer solely to decedent, John, and Forrest.
In or about 1951 the partners entered into an oral agreement which provided that in the event of any partner's death, the remaining partners would purchase the deceased partner's interest in the company. The partners decided to fund the partnership purchase agreement by means of insurance. This agreement will hereinafter be referred to as the partners' agreement.
In 1953 John and Forrest each purchased a life insurance policy from Northwestern Mutual Insurance Co. of Milwaukee, Wis. (hereinafter referred to as Northwestern), on decedent's life in the respective amounts of $33,000 and $17,000 as a means of funding the aforesaid agreement. Paul Miller, Jr. (hereinafter referred to as Miller), who represented Northwestern, acted as their agent. John and Forrest considered that the amounts of the Northwestern policies were minor and that they would increase their insurance coverage as soon as they were financially able. The policies specifically provided that the respective beneficiaries were the sole owners thereof. Each policy was paid for by and remained in the possession of the respective beneficiaries.
Other pertinent provisions of the Northwestern policies stated as follows:
Control of said policy shall be as follows, and the present
control provisions shall be amended accordingly:
Before said policy becomes payable, the power to exercise all policy rights and privileges and to change or revoke any provision of this form is hereby vested solely in John J. Fuchs. In the event of the death of John J. Fuchs, any remainder of said power shall be vested solely in the executors, administrators or assigns of the survivor of them. All policy provisions inconsistent herewith are suspended.
Because their business operation required frequent travel, the partners realized the desirability of having comprehensive accident insurance coverage on an annual basis.1 Consequently, in 1954 John met with Miller and discussed the possibility of obtaining accident insurance as an additional means of funding the buy-sell agreement. Miller recommended the purchase of policies from the Continental Casualty Insurance Co. of Chicago, Ill. (hereinafter referred to as Continental Casualty).
On September 7, 1954, the decedent made application to Continental Casualty for an accidental death insurance policy naming John the beneficiary. Pursuant to said application Continental Casualty issued policy No. SRD-251860 () in the amount of $65,000.
On September 7, 1954, John made application to Continental Casualty for an accidental death insurance policy naming decedent the beneficiary. Pursuant to said application Continental Casualty issued policy No. SRD-251859 in the amount of $50,000.
On September 7, 1954, decedent applied to Continental Casualty for an accidental death insurance policy naming Forrest as beneficiary. Pursuant to said application, Continental Casualty issued policy No. SRD-251858 () in the amount of $35,000.
The policy amounts decided upon were related to the partners' percentage interests in the company.
Miller wrote the aforesaid policies as a broker agent through Continental Casualty. Miller had been instructed by the partners that the Continental Casualty policies were to be issued in the same manner as the Northwestern Mutual policies— that is, the beneficiary of each policy was to be the owner thereof, pay the premiums, and collect the proceeds. The Continental Casualty policies were intended to supplement John's and Forrest's Northwestern policies. However, Miller failed to draw up the policies so as to reflect the partners' intentions.
Miller delivered each policy to the respective beneficiaries. Upon receiving the Continental Casualty policies, John and Forrest gave said policies to the company bookkeeper and instructed her to place them in the company safe. They told her that each partner owned that policy whereupon his name appeared as beneficiary. Each policy was kept in a separate envelope which bore the name of the partner who was beneficiary of the policy contained therein. The policies remained in a safe in the company's office until decedent's death.
All three policies were similar in wording. Pertinent provisions of each policy provided as follows:
11. Indemnity for loss of life of the Insured is payable to the beneficiary if surviving the Insured, and otherwise to the estate of the Insured. All other indemnities of this policy are payable to the Insured.
12. If the Insured shall at any time change his occupation to one classified by the Company as less hazardous than that stated in the policy, the Company upon written request of the Insured and surrender of the policy, will cancel the same and return to the Insured and surrender of the policy, will cancel the same and return to the Insured the unearned premium.
13. Consent of the beneficiary shall not be requisite to surrender or assignment of this policy, or to change of beneficiary, or to any other changes in the policy.
16. The Company may cancel this policy at any time by written notice delivered to the Insured or mailed to his last address, as shown by the records of the Company, together with cash or the Company's check for the unearned portion of the premiums actually paid by the Insured, and such cancellation shall be without prejudice to any claim originating prior thereto.
The second sentence of the first paragraph of Part IV of each policy provided: ‘Any premium paid to the Company for any period not covered by this policy will be returned to the Insured.’
Premium notices addressed to the respective applicants of each policy were mailed to the company. The premiums for each of the policies were paid annually by one check written on the company's account for the total of the premiums. The premiums for each individual policy were charged to the partnership withdrawal account of that partner whose name appeared on the policy as beneficiary. At the end of each partnership year the balance of each withdrawal account of Forrest, John, and decedent was closed by a credit entry to the respective drawing account and a debit entry to their respective investment accounts.
John and Forrest first learned that the Continental Casualty policies had been billed to the insured rather than to the beneficiaries after respondent's notice of deficiency herein was sent to petitioner.
Subsequent to decedent's death, the insurance proceeds provided for in the Pflasterer policy were paid to Forrest and those provided for in the Fuchs policy were paid to John.
During 1960 policy No. SRD-251859, which had been applied for by John, the insured thereunder, was canceled. A check dated December 27, 1960, for the purpose of refunding the unearned premium was sent to John. John immediately remitted said check to petitioner.
Pursuant to the buy-sell agreement, John and Forrest purchased decedent's and Pearl's partnership interest in the company from decedent's estate within approximately 3 months of decedent's death, using the Continental Casualty insurance proceeds to fund such purchase.
In his notice of deficiency respondent determined, inter alia, that the proceeds of the Fuchs and Pflasterer policies were includable in decedent's gross estate (1) under the provisions of section 2042 of the Internal Revenue Code of 1954 since decedent had incidents of ownership with respect to those policies within the meaning of that section and (2) under section 2033 since decedent had interests in the policies at the time of his death.2
The purpose of the insurance policies in issue was to fund an oral buy-sell agreement between decedent, John, and Forrest.
It was the agreement and understanding of the partners that all insurance policies purchased by them on each other's lives would be owned by the respective beneficiaries, with all rights, title, and interest in the owner-beneficiary, and with no interest, privilege, or rights in...
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...of Congress' elimination of the premium payment test. See Estate of Skifter v. Commissioner, 56 T.C. at 1197. 10. In Estate of Fuchs v. Commissioner, 47 T.C. 199, 206 (1966), each of two partners (John and Forrest) had obtained insurance on decedent-partner's life to fund a buy-sell agreeme......
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...Jordahl, 65 T.C. 92, 100 (1975); Estate of Hector R. Skifter, 56 T.C. 1190 (1971), aff'd, 468 F.2d 699 (2d Cir. 1972); Estate of Bert L. Fuchs, 47 T.C. 199 (1966), and apparently has also been adopted by the Court of Claims, Gesner v. United States, 600 F.2d 1349 (Ct.Cl.1979) (finding that ......
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